The AI boom faces a significant threat from America's ballooning national debt, with some analysts suggesting this could be the pin that bursts the bubble. The AI industry relies on vast amounts of borrowed money for its expansion, but the US government's own debt requirements are creating competition for capital. The increasing cost of borrowing, as seen in the 10-year US Treasury bond yield, is a critical factor, with some suggesting a decisive breach of 5% could pop the AI bubble by making large-scale AI projects economically unfeasible.
Indeed, the 10-year US Treasury yield recently hit 5%, a global benchmark for borrowing costs, which could lead to a new era of tighter money. This makes it harder for AI companies to secure the necessary funding through bond and equity issues. When Big Tech companies must compete for capital with a government offering over 5% on bonds, many AI mega-projects risk being crowded out of debt markets.
Companies are currently spending over $1 trillion on data centers and other AI infrastructure, while estimated annual revenue from AI use is around $200 billion this year. This substantial funding gap is largely covered by new bond and equity issues. A 10-year bond yield exceeding 5% would top the earnings yield of the US stock market, historically a headwind for stocks, and would significantly slow down these crucial funding channels for AI companies.
